United Rentals’ board of directors last week announced that it is acting upon a report by a special committee of independent directors in regard to a Securities and Exchange Commission inquiry.
The company confirmed there were irregularities with respect to six sale-leaseback transactions, and the board approved United’s plan to restate results for those transactions. United also concluded there were irregularities with respect to some trade packages involving undisclosed inducements.
The committee also made findings regarding company practices in connection with equipment acquired in purchase business combinations between 1997 and August 2000.
The committee reviewed seven minor sale-leaseback transactions entered into between December 2000 and March 2002. It concluded that the accounting for six of these transactions involved irregularities and that information was concealed from United’s auditors. These six transactions accounted for reported gross profit of $12.2 million, $20.2 million and $1 million in 2000, 2001 and 2002 respectively. United improperly recognized revenue from these transactions and expects to restate results for applicable periods.
The committee also reviewed “trade package” transaction in which United sold used equipment to certain suppliers that may have included a premium above fair value to induce these suppliers to buy used equipment at premium prices. The committee concluded that during the period between the fourth quarter of 2000 through 2002, the company made commitments or concessions to suppliers to induce them to buy the used equipment. The committee found that the commitments or concessions were not disclosed and that the company improperly recognized revenue from the transactions involving the undisclosed documents, and found that as a result of instructions given by former employees, documents were not created that would have permitted the linkage of the sales and inducements.
United generated gross profits of $9 million during this period and because of the lack of documentation, is unable to determine the portion that resulted from the trade packages. The company determined that disclosure, rather that a restatement of results for these period, is appropriate.
The committee also reviewed United’s historical practices concerning its accounting for purchase business combinations. With respect to its practices in valuing equipment acquired in purchase business combinations, the committee concluded that certain of these practices were not adequate between 1997 and August 2000. The practices included the use of inconsistent valuation methodologies, some of which were reflected in memoranda not reviewed by the company’s auditors. Despite deficiencies in its historical valuation process, United does not believe a restatement is required.
United officials added that with respect to the company’s practice of recognizing profit on sales of equipment within one year of its acquisition in a purchase business combination, the committee reviewed accounting practices and did not conclude that policies were incorrect.
The board of directors directed a number of actions to address issues identified by the committee, including the development and distribution of an acquisition accounting manual; development of a plan to centralize control of document retention; creation of more defined job descriptions for corporate positions and more specific responsibilities for executives; and scheduling of additional regular meetings between the chairman of the audit committee, the chief financial officer and the independent auditors. The board also recommended the issuance of a policy regarding package sales of equipment and sales to vendors.
The board also directed the company to remove its corporate controller and principal accounting officer and its vice president of finance from their positions, although there was no finding of intentional wrongdoing on the part of these individuals. The company is dismissing two other employees and issuing written reprimands to three others. The board fired president and chief financial officer John Milne in August of last year for failure to answer questions from the committee.
The committee found no wrongdoing on the part of chairman Brad Jacobs or CEO Wayland Hicks.
“The report by our special committee represents a significant step forward for the company,” said Hicks. “By its actions today, the board has reaffirmed United Rentals’ commitment to the highest standards of conduct in our business. The misconduct by some of our employees found by the committee is unacceptable. The company remains fully committed to cooperating with the SEC inquiry.”
In other United news, the company last week reaffirmed its previously announced full-year 2005 outlook for diluted earnings per share of $1.68 to $1.75 and free cash flow generation of approximately $100 million. On Nov. 1, 2005, the company announced that it raised its 2005 outlook for diluted earnings per share to the present level based on strong operating performance.
United expects to report its 2005 financial results in March 2006.
United Rentals is the largest rental company in North America, No. 1 on the RER 100.